2.5, 2.6, 2.7, 2.8 Price Determination Flashcards
When is a market in equilibrium?
A market is in equilibrium when demand equals supply (1) and there is no pressure for price to change (1)
Draw a graph showing a market in equilibrium with a market clearing price at P & quantity at Q.
Define excess supply and what causes it.
Excess supply occurs when the supply is greater than the demand . It can occur when prices are too high or when demand falls unexpectedly.
Define excess demand.
Excess demand occurs when the demand is greater than the supply. It can occur when prices are too low or when demand is so high that supply cannot keep up with it.
Define consumer sovreignty
Consumer sovereignty is the economic power that consumers have through their purchasing decisions. This determines demand for goods and services and influences the output of firms.
Describe how a market system works.
- Buyers and sellers meet to trade at an agreed price.
- Buyers agree the price by purchasing the good/service.
- If they do not agree on the price then they do not purchase the good/service and are exercising their consumer sovereignty.
- Based on this interaction with buyers, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties.
- At the equilibrium price, sellers will be satisfied with the rate/quantity of sales and buyers are satisfied that the product provides benefits worth paying for.
Draw a diagram to explain excess demand.
Draw a diagram to explain excess supply.
Draw a diagram showing the effect of an increase in demand.
Draw a diagram showing the effect of a decrease in supply.
List the factors that determines the Price Elasticity of Demand (PED) for a good.
- Availability of substitutes.
- Addictiveness of the product.
- Price of product as a proportion of income.
- Speed of change (time to find substitutes).
What is the formula for the calculation of Price Elasticity of Demand?
